Global growth could accelerate, but China’s fortunes hold the key

In the last three decades, the world economy has grown by a remarkably similar
rate.

Most people either don't realise or don't want to accept that state-run China will continue to become more importantPhoto: EPA

By Jim O’Neill

6:02PM BST 17 May 2013

That time period, which coincidentally spans my professional career, has seen the global economy increase by approximately 3.4pc per annum in purchasing power parity terms.

For the last few years, a central thesis of mine has been that, because of China’s ascent, this decade could see the world growing by just over 4pc. Such a figure confounds not only the pessimists so prevalent since the 2008 credit crisis, but also surprises those who believe the world has a reasonably stable trend rate of growth.

It is quite easy to show that if China grows by around 7.5pc this decade, itself a somewhat softer target given the 10.25pc of the past three decades, and if the US, Europe and Japan restore growth to their trend levels, the world will grow by this stronger number. China in US dollar terms is now an $8.2 trillion (£5.3 trillion) economy. Its impact, even at softer rates of growth, is becoming bigger and bigger.

Normally, when I explain these numbers to an audience, people are sceptical for two reasons. First, they are highly dubious that the US, Japan and especially Europe can restore their growth performance.

Secondly, most either don’t realise or don’t want to accept that state-run China will continue to become more important, especially as evidence grows that it is slowing from its previous double-digit growth rates. Throughout most of the last few years, I have generally believed that people are in for a pleasant surprise; I anticipated the global equity rally that we are experiencing.

In the short space of time since I moved on from Goldman Sachs, I have found myself asking two questions I didn’t expect to. Is there something inherent in the world economic system that means we can only grow by 3.4pc each decade? And if China — and other so-called large emerging economies — continue to see their importance increase, does the obvious corollary hold true: that other regions will see weaker growth?

Put another way, does their strength mean weakness for us? Will this decade’s surprise turn out to be that China slows even more than the 7.5pc growth I have been assuming?

I find myself wondering about the latter because some of the more useful indicators I have learnt to trust for China continue to soften, in addition to the news of the softer than expected Q1 real GDP growth of 7.7pc.

An index of Chinese financial conditions — a combination of monetary growth, interest rates and their equity market — remains quite subdued. And I hear more and more anecdotal evidence that China is no longer the cheap home it was for manufacturers around the world due to continued wage increases and the strength of the renminbi.

To some extent, softer growth in China is not bad news for the rest of us. It is probably a major reason why a number of important commodity prices have seen significant reversals. That’s not great short term for many commodity-intensive producing countries, but it is good news for many others.

One of the reasons why the likes of the UK may have struggled to rediscover economic growth since 2008 is the persistent rise in imported commodity costs, adding to pressures on real disposable incomes.

But, if commodity prices are now easing, that’s no longer the case. It could also mean the decline in sterling since 2009 might still bring some reward for the economy, which has until recently been so hard to detect. Also, as long as China’s consumption continues to perform well, that is what really matters to anyone wanting to export more to them.

So what about the recent evidence from our own and other so-called developed economies?

Our stock markets seem to be enjoying themselves. Many ascribe the robust performance of stocks as nothing more than the consequence of friendly monetary policies all over the world. While I am sure this is playing its part, it was just as fashionable to argue the same easy monetary policies were also fuelling the commodity rally some time ago, so perhaps it isn’t that simple.

Maybe something a bit more substantive is happening. After the pleasant surprise of +0.3pc real GDP in the UK in Q1, many of us were braced for the resulting setback, which would follow the pattern of the past couple of years. But while it is early days, quite a bit of recent economic news has continued to be on the positive side.

While much of the eurozone continues to struggle, US performance remains encouraging; a housing recovery and a competitive boost from cheaper domestic energy seem to have underpinned the improvement.

And, while we don’t export a great deal to Japan these days, the improving mood of the Japanese consumer to the country’s monetary and fiscal boost suggests that a number of other economies will take heart. It is too soon to be singing in the streets, but the signs are looking better than they have for a while.